Can there be good Middle Eastern state-owned enterprises?

A June 23, 2008 file photo shows a flame from a Saudi Aramco oil installation known as “Pump 3” in the desert near the oil-rich area of Khouris, 160 kms east of the Saudi capital Riyadh. (Marwan Naamani/AFP/Getty Images)
The role of state-owned enterprises (SOEs) in developing countries has long divided economists, politicians and development agencies. In the 1960s and 1970s, many poor countries saw state control of key industries – the “commanding heights” – as a way to kick-start the development of a modern economy. In the 1980s and 1990s, however, the tide turned against state-led development strategies. With the collapse of Soviet communism and a turn toward privatization in the developed countries, Western governments and international financial institutions began pushing developing countries to privatize their SOEs. Starting in the 1980s, major aid donors began demanding compliance with International Monetary Fund and World Bank Structural Adjustment Programs (SAPs) built around the notion that pure capitalism held all the answers to poor countries’ economic development challenges.
The ideologically-charged debate over privatization versus state ownership often overlooks something critical: the quality of state-owned enterprises. State control does not necessarily mean inefficiency. Partly or wholly government-owned firms, particularly in Europe, can be highly competitive. What matters is corporate governance: Efficient state-owned firms are usually set up like private companies, while inefficient ones are run like government bureaucracies.
Alissa Amico’s recent Monkey Cage article highlighted how some SOEs in the Middle East have avoided the most common pitfalls of such firms, such as lack of competition and low profits. Not all states are “inept capitalists,” she notes, citing several examples of competitive, profit-driven SOEs, almost all of which are owned by oil-rich states in the Arab Gulf Cooperation Council (GCC). This contributes to the mounting evidence that immediate privatization is not necessarily an ideal solution in the Middle East or other developing economies. As Amico suggests, “corporatization” is what matters. When a publicly held enterprise seeks to increase its profit margins – rather than simply hand out patronage jobs, cheap loans and subsidized goods – it can play a positive role in the economy. A 2013 paper out of the Insper Institute of Education and Research in Sao Paulo, Brazil demonstrates that in countries where the state’s financial markets are less developed, certain businesses can actually benefit from government support, which often comes with preferential lending rates.
In other words, there are trade-offs to state ownership. Governments may choose to hold a majority stake in industries that are important to a country’s stability – energy, telecommunications – but this “can open the door to minority investors taking a hit, say as when a government-owned company holds down the price of gasoline in order to benefit voters,” thereby reducing profits. On the other hand, businesses that are owned in small part by the government may engage in cronyism, “jockeying to curry favor with government for preferential investments or loans based on political connections.” In terms of efficiency, however, corporate governance standards are essential to ensuring all firms play by the same rules and, hopefully, are set up to turn a profit. State ownership does not necessarily lead to low or no profits, but this revenue-based analysis misses what should be some of the less tangible aims of privatization.
The Middle Eastern context can help to contextualize this debate with a broader view of SOEs and a deeper historical analysis of their role throughout the last century. One of the iconic examples – and subsequent greatest failures – of the SAP approach was that of former Egyptian president Hosni Mubarak. The state-owned textile industry was privatized, slashing its workforce in half, while immediate cuts to food and fuel subsidies drove up the cost of living dramatically. While there is little argument that Egypt’s state-owned textile factories were inefficient and that consumer goods subsidies are an expensive, distorting and highly regressive way of distributing benefits to the population, the focus on immediate and dramatic privatization caused more disruption than development – and in any case many of the reforms were ultimately reversed or watered down. Scholars have since suggested that SAPs and forced privatization hurt the most vulnerable classes in the developing world while not necessarily achieving their goals of long-term sustainable development.
The success of SOEs in GCC countries, on the other hand, shows that undergoing quasi-privatization can lead to greater efficiency and profits. What Batelco in Bahrain, SABIC in Saudi Arabia, Etisalat in the United Arab Emirates and others have done is learn from and adopt best practices from the private sector. While they have not undergone privatization per se, they have corporatized by professionalizing their boards and management, entering competitive markets and diversifying with an eye to risk management. Essentially, they have become more transparent and accountable. In a world with fewer and smaller centrally planned economies, the dichotomy of privatization versus state-owned enterprise is a false one. Rather, success in either approach depends on a shared commitment to the principles of corporate governance.
We should exercise caution in applying lessons of the Gulf to other countries in the Middle East and North Africa, however, particularly those that experienced democratic protests and revolutions in 2010 and 2011. To start, the Arab Gulf monarchies have had different trajectories than their poorer Arab brothers since the discovery of oil in the interwar period. The United States and European powers successfully negotiated concessionary arrangements with Arab governments after the discovery of oil in the 1920s and 1930s, leading to total direct control of oil resources by foreign firms in Iraq, Saudi Arabia, Kuwait, Qatar and Abu Dhabi by 1954. The same is true in many non-oil sectors; Bechtel, for example, capitalized on the profitable combination of oil money and zero existing infrastructure to win major development projects from the Saudi monarchy. At that time, the local capacity for such diverse projects as electrification of cities, development of national railroads and airport construction was minimal, meaning much of the initial state-building was driven by foreign firms.
Many of the Gulf’s current SOEs experienced decades of efficient private management, whereas SOEs in other Arab countries were only briefly controlled by multinational investors. While other oil-producing countries in the region such as Egypt, Iraq and Iran nationalized oil in the 1950s and 1960s, the Gulf monarchs did not nationalize until the 1970s and 1980s. Libya began the nationalization process in the late 1960s, but since Libya had only discovered oil in the late 1950s the industry’s exposure to the global market was still short lived. Gulf sheikhs and kings negotiated smooth state takeovers of their oil resources from their foreign owners. In Iraq, Egypt and Libya, the state seizure of oil exploration and extraction was carried out more abruptly by newly installed military leaders.
Even once Arab states nationalized their petroleum industries, not all states put the same emphasis on efficiency. Though not by any stretch democratic, al-Saud kings in Saudi Arabia, al-Sabbah emirs in Kuwait and long lines of Emirati sheikhs and Omani sultans all represent longstanding dynasties in power since long before the first oil wells became operational. Their primary interest has been maintaining the stability of existing social structures, not overturning them. With relatively small populations and large oil endowments, these states could rely solely on the profits of their efficiently-run extractive industries to keep these traditional structures in place.
For the Arab military governments that consolidated power in the 1950s and 1960s, newly nationalized enterprises fed into a different, more revolutionary political agenda. Hafez al-Assad in Syria, Muammar Qaddafi in Libya and a series of Tunisian and Egyptian dictators relied not on pre-ordained dynastic claims but rather a potent mix of military power, pan-Arab ideology, violent repression and socialism. Both models of rule monopolize power through false legitimacy, but it was military dictators who relied most heavily on the state’s management role to placate their populations: As long as the government provided subsidized goods and stable employment, citizens remained submissive. This view of SOEs as a source of patronage jobs and cheap consumer goods led to mismanagement and economic inefficiency.
Only when the model failed – essentially, when the population outgrew these governments’ capacities – did protesters take to the streets. Many observers of the region have suggested that without the failure of the old social contract and the depletion of state coffers in the 1990s and 2000s, the 2010 and 2011 uprisings might not have taken place.
So far, explanations for successful SOEs have included the industry’s incubation period, the political needs of the state’s ruling elites and the adoption of private sector practices. But perhaps we should consider our definition of a “successful” state-owned entity. Privatization versus state ownership is not just a matter of creating profitable entities; it is a question of institutional transparency, equal opportunity and rule of law. Weak corporate governance and murky management is linked to financial collapse, inability to attract investment, persistent corruption, weak property rights and other challenges faced by authoritarian countries around the world. In short, state ownership aids and abets the abuse of power and betrayal of public trust that characterizes authoritarian regimes the world over. Corruption and crony capitalism were at the heart of the authoritarian regimes in Syria, Libya, Tunisia and Egypt. Is it enough for an enterprise to be profitable if it perpetuates an exclusive patronage system at the expense of the population?
Privatization is a nuanced issue: It does not guarantee profit, does not prevent corruption and is not always the better economic model. There is no binary and many democratic governments have successful state-owned enterprises with independent boards of directors and public stock exchange listings. But the history of state ownership in the Middle East and North Africa is rich with its own nuances, and a state’s economic wellbeing has not always been the driving force behind the management of certain state-owned entities. State ownership in an authoritarian environment stifles democratic principles; monopolization of economic resources feeds monopolization of political power.
Abdulwahab Alkebsi is the regional director for Africa and MENA at the Center for International Private Enterprise.